Deficit, Trade Imbalance Require Dollar Devaluation

THE ECONOMIC leaders of five major industrialized nations Sunday acted with prudence and common sense in announcing they were prepared to cooperate in efforts to drive down the value of the dollar.

In the last five years, the dollar has increased in value from 30 to 40 percent over most major currencies. It is so overvalued that it threatens the stability of the world economic system.

American tourists may complain about the decision by the United States, Japan, West Germany, Britain and France, to intervene in the currency markets since the overvalued dollar has made overseas travel a bargain. The action, however, is in the long-term best interest of this country since it can help restore equilibrium in a trade imbalance that could reach $150 billion this year.

Because the value of the dollar has been so high in relation to other currencies, the United States is importing heavily. Conversely, the high- priced dollar has made American goods sold overseas extremely expensive, thus hurting U.S. exports.

American money has been flowing overseas, rather than staying here to build the U.S. economy. The result: Lost jobs for Americans, a slowdown in the growth of the United States economy and increased calls for the imposition of trade barriers that could damage world commerce.

The overvalued dollar also has distorted world markets, particularly in energy, since OPEC uses dollars. Among other things, the high-priced dollar makes it more expensive for Europeans to import oil because of the relative weakness of their currencies.

For years, the Reagan administration has contended that a free market would restore equilibrium to currency values. That, however, has not been the case and the huge federal deficit is largely to blame for the problem.

The credit demands caused by the deficit have driven up interest rates, making the dollar an attractive investment, thus increasing the price of the dollar. Implicit in the new strategy is for the five industrialized nations to cooperate in selling dollars they hold in reserve, thus increasing the supply of dollars and reducing the cost.

President Reagan Monday followed the announcement on the dollar by saying that United States would take stern action to combat unfair trade practices that hurt American exporters. He also called for creation of a $300 million fund to help American firms compete with subsidized foreign companies.

The president is attempting to head off the growing sentiment in Congress to impose trade barriers. That sentiment, however, along with the need to intervene in currency markets, would not be so acute if the United States addressed its most pressing problem -- enormous federal deficits.